Yellen's Testimony Tanks; Trade, Don't Invest: Best of Kass

NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

Last week, Kass wrote on The Muppets Take the Fed and closed-end municipal bond funds.

The Fed isn't raising rates. It believes it can opine and twist and tweak words to manage the world economy. They are geniuses in booms and saviors in busts, but in reality, they are just dangerous interventionists whose policies are widening the wealth gap and creating immense capital misallocation.

If I were a senator, I would be throwing tomatoes on Capitol Hill today.

Insert your favorite central banker or master of the world economist for Dr. Bunsen Honeydew and make poor Beaker the taxpayer.

BTW, does it get any better than this description of Dr. Bunsen Honeydew in relation to our ever increasingly "transparent" central bankers?

Dr. Bunsen Honeydew, Ph.D. is a Muppet character from "The Muppet Show," performed by Dave Goelz. He is a bald, green-skinned, bespectacled, lab-coated scientist who would do periodic science segments from "Muppet Labs, where the future is being made today." The character has no eyes -- only completely transparent, lensless glasses.

All's seemingly well, post all those bailouts and explosion in government debt. Government debt was a real issue back in 2008; now that it has more than doubled, it's not relevant. Beaker, however, is confused.

Dr. Bunsen Honeydew: "I knew we were right. This is what progress is all about! Let's do even more!!!" Beaker's stocks are higher than ever; he concedes to the all-knowing and extra-confident doctor.

The purpose of my diary is to explicitly and transparently show the analysis behind my trading/investing transactions.

Unlike others, I am not recommending stocks.

That is your job, and it's your homework every day to distill all of the input (perhaps including mine and certainly some of the goodies on this site from people such as Jim "El Capitan" Cramer, Helene "The Divine Ms. M." Meisler, Rev Shark, Tim Collins, Paul "The" Price "Is Right" and others) so that you can to make sensible investment decisions relative to your risk profile and time frame. (Note: As an aside, I would watch this thoughtful "Mad Money" segment from last night, in which Jim provides some sage advice.)

I will, however, suggest one investment this morning that I encourage you to consider.

As I warned three days ago in "A Bullheaded Market," multiple warning signs portend that the U.S. stock market possesses an unattractive reward vs. risk -- importantly, this includes the notion that geopolitical risks all around the world are rising geometrically -- and those signs are being ignored.

Again, some of these caution flags include rising valuations (adjusted for a normalization in corporate profit margins), climbing geopolitical risks, technical breakdowns (including but not isolated to a lagging Russell 2000), an imbalanced and exclusive domestic economic recovery and subpar U.S. and global economic recoveries.

"The whole problem with the world is that fools and fanatics are always so certain of themselves and wise people so full of doubts."

-- Bertrand Russell

These conditions provide a cocktail of market uncertainty that is likely to provide a market hangover. This is particularly true after a near-trebling in the S&P 500 since the generational bottom of 2009.

My investment suggestions this morning are simple and direct.

Step back and err on the side of conservatism now.

Maintain larger-than-normal cash positions.

Be more diversified across company/sector lines than is typical for you.

Trade opportunistically (with less frequency), and unless your time frame is measured in years, avoid investing for now.

Mr. Market will always be there for us, and when you feel it is a bit safer to return, do so.

Moving to a more specific strategy, recent events underscore a favorable reward vs. risk in closed-end municipal bond funds. The performance of the group this year is up by better than 10%, proving again that the tortoise can outrun the hare.

I own 14 closed-end municipal bond funds, and I have six of these names on my Best Ideas list. These funds are still at a larger-than-historic discount to net asset value and generate excellent (pre-tax equivalent) yields. As I have noted (and in support of the evident value), Nuveen recently announced a partial tender (10%) at 98% of net asset value for four of its funds. This asset class, highlighted in January in my "15 Surprises for 2014," could provide investors with not only a great risk-adjusted return but also a potentially large absolute return.

At the time of publication, the author was long BTT, BKN, ETX, VCV, VPV, VGM, NAD, NMA, NMO, NRK, NPI, NPM, NQU and NQS, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.